Funds Pull Back From Permian As US Shale Oil Firms Go Into Overdrive
NEW YORK, June 16 (Reuters) - Cash, people and equipment are pouring into the prolific Permian shale basin in Texas as business booms in the largest U.S. oilfield. But one group of investors is heading the other way - concerned that shale may become a victim of its own success.
The speed of the recovery in the U.S. shale industry in the past year has surprised oil investors after a global supply glut led to a two-year crude price slump and bankrupted many shale firms.
Eight prominent hedge funds have reduced the size of their positions in ten of the top shale firms by over $400 million, concerned producers are pumping oil so fast they will undo the nascent recovery in the industry after OPEC and some non-OPEC producers agreed to cut supply in November.
The funds, with assets of $286 billion and substantial energy holdings, cut exposure to firms that are either pure-play Permian companies or that derive significant revenues from the region, according to an analysis of their investments based on Reuters data.
The Permian, which stretches across West Texas and eastern New Mexico, produces about 2.5 million barrels of oil per day (bpd), accounting for more than a quarter of overall U.S. crude production.
"We'll have to see if these U.S. producers have the discipline to not go crazy and keep prices where they keep making money," said Gary Bradshaw, portfolio manager at Dallas-based investment firm Hodges Capital Management.
Hodges Capital owns shares of Permian play firms including Diamondback Energy Inc, RSP Permian Inc and Callon Petroleum Co. Bradshaw's firm has maintained its exposure to the Permian.
There is no sign that shale producers will restrain production. They redeployed rigs and personnel quickly since prices began strengthening in 2016 and made shale profitable again; rig counts have risen by 40 percent this year in the Permian, which accounts for about half of all U.S. onshore oil rigs.
Hedge funds pulled back in the first quarter, according to the most recently available regulatory filings, and the stocks have continued to struggle as oil prices have come under renewed pressure.
The value of these funds' positions in the 10 Permian companies declined by 14 percent, to $2.66 billion in the first quarter, the most recent data available, from $3.08 billion in the fourth quarter of 2016.
Hedge funds have continued to reduce their exposure to energy stocks in the second quarter, said Mark Connors, global head of portfolio and risk advisory at Credit Suisse, though he could not provide figures specific to shale companies.
Fund managers interviewed expressed concern that volatile oil prices along with rising service costs and acreage prices are not reflected in overly optimistic projections for the Permian.
The funds analyzed include Pointstate Capital LP, a $25 billion fund with 16 percent in energy shares, and Arosa Capital Management, a $2.1 billion fund with more than 90 percent of assets in energy stocks. Pointstate and Arosa declined comment.
"Margins will continue to be squeezed by a 15 to 20 percent increase in service costs in the Permian basin," said Michael Roomberg, portfolio manager of the Miller/Howard Drill Bit to Burner Tip Fund.
View Full Article
WHAT DO YOU THINK?
Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
- Weatherford CEO's Rebound Plan Relies On Getting Smaller
- Iran Says Oil Market Is Too Tight For US Zero Exports Target
- China's Squeezed 'Teapots' Eye Petchem Path To Riches
- Baker Hughes: US Drillers Add Oil Rigs For Second Week In Three
- Venezuela Hands China More Oil Presence, But No Mention Of New Funds